Equity investment could become challenging

On an historical comparison basis, equities are beginning to look less cheap, a development serving to weaken the 'relative' valuation argument. As this bull market matures, this will ultimately trigger a move away from equities. With this in mind, we are growing cautious, recognising investors are likely to become ever more sensitive to results that fail to meet expectations.

In the medium term, we remain moderately bullish with regard to the direction of the market, a positioning that is influenced by 'relative' valuations.

Private equity deals contribute to the current trend towards 'de-equitisation', whereby public equity is being retired through leveraged buyouts along with corporate share buybacks. With a relatively constrained supply of new issues coming to the market, combined with positive fund flows into equity funds, there is more money chasing less stock.

Notwithstanding these positives, equity investing is likely to become more challenging, as we believe global economic growth is slowing. This stance is predicated on our view that the liquidity environment will become tighter as a consequence of higher interest rates and weaker growth in the world monetary base. Although broad liquidity has remained plentiful, with aggressive lending by commercial banks despite rate hikes in the UK, Europe, China, we do not envisage this scenario lasting indefinitely.

US macroeconomic data releases remain a key influence on investor sentiment globally, with recent news flow moderately positive. However, a number of concerns predominate, including the threat of geopolitical conflict, and market uncertainty about the future path of inflation and interest rates, in addition to sub-prime mortgage problems and the weak housing sector. Amid slowing growth, even if US led, investors may come to consider US assets a relative safe haven. Increasingly, however, we believe that Europe may be a more prominent beneficiary of any reallocation away from higher risk assets.

We believe the Japanese equity market offers some compelling opportunities. However, we acknowledge domestic and international sentiment towards this market remains weak and may weaken further.

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